Credit Card Guide » Michael Dolenhttp://www.creditcardguide.com/credit-cards
The Leading Source of Credit Cards OnlineWed, 29 Jul 2015 13:07:47 +0000enhourly1http://wordpress.org/?v=3.3.2Low Interest vs. High Rewards: Which Should You Go For?http://www.creditcardguide.com/credit-cards/low-interest-vs-high-rewards-which-should-you-go-for.html
http://www.creditcardguide.com/credit-cards/low-interest-vs-high-rewards-which-should-you-go-for.html#commentsTue, 26 Feb 2013 15:55:26 +0000Michael Dolenhttp://origin.creditcardguide.com/blog_app/?p=4677In today’s guest blog, Michael Dolen of CreditCardForum explains why you’re not likely to find a card with both a great sign-up bonus and a long 0 percent period — and how to choose between these two perks.

Whether it’s a lingering debt hangover from the holidays or just wanting to find a better rewards program, the first part of the year is one of the most popular times to apply for a new credit card.

As a result, card issuers are offering a plethora of great sign-up incentives, featuring low interest rates and big rewards bonuses. For example, you can find 0 percent APR card offers for up to 18 months or 40,000 bonus points deals. Unfortunately, however, you’re not going to score both a long interest-free period and a juicy bonus offer at the same time. Here’s why…

Reason No. 1: Zero percent offers cost banks money

Granted it’s not a lot these days, but banks still have to pay interest on the money they borrow and then lend out to you in the form of a 0 percent offer. Because the bank is already taking a hit on these offers, it’s much less inclined to take another hit by also giving you a cash or points bonus.

Reason No. 2: Two different types of customers

It’s true that everyone likes to earn rewards, but generally speaking, a customer with credit card debt has different priorities from the rewards chaser. People with debt are looking to minimize their interest costs. Those who always pay their bills in full each month, on the other hand, are much more focused on rewards programs, since the APR will be largely irrelevant to them. Rather than target both types of customers with the same offer, most banks prefer to create different cards and incentives for each group.

Reason No. 3: Higher rates help offset the rewards expense

It costs money for credit card companies to give us cash back and airline miles on our purchases. Some of that expense is offset by the processing fees (the fees merchants pay to process your card). In addition, any finance charges we pay on balances also help pay for the rewards. This is why the best reward cards almost always have higher interest rates (not to mention annual fees!) than low-interest, plain vanilla cards.

For example in my review here of the Chase Freedom card, I discuss how it gives up to 5 percent cash back and has a variable APR of 12.99 percent to 22.99 percent. On the other hand, the APRs on low-interest cards from Simmons First National Bank, a purveyor of plain vanilla cards, are astonishingly low at 7.25 percent or 9.25 percent.

Aim for rewards or low rates, not both!

There are some cards that offer both 0 percent APR and a rewards bonus, but you will see their offerings in both categories are mediocre at best. If you want to get the top balance transfer offers on the market, then you will want to go after a card that gives you that and nothing else. On the flipside, if it’s the rewards bonus you are after, you will see the most generous cards don’t give you 0 percent — and if they do, it’s only for a relatively short period of time.

Now if you still insist on having your cake and eating it, too, the best way to accomplish that will be to apply for two separate offers — one for low interest and another for rewards. Be forewarned, however, that every time you apply for a card, the issuer will check your credit, which will temporarily ding your credit score. My advice is to apply for the card you want most first, then wait a month or two before applying for another card.

Michael Dolen is the founder and managing editor of CreditCardForum.com, which is the leading online

forum solely dedicated to credit cards. His “no holds barred” credit card reviews and commentary are regularly featured in financial publications and websites such as The Wall Street Journal, The New York Times, Bloomberg and US News & World Report.

His knowledge and expertise come from real world experiences. After being left with monstrous medical expenses from an auto accident at age 18, he strategically used 0% credit card offers to finance his out-of-pocket costs not covered by insurance. These days, he’s debt free and focuses on finding new ways to maximize rewards and milk cardholder benefits. As a small business owner, he’s also well aware of the struggles that both entrepreneurs and established companies face when it comes to business credit in today’s economy.

When he’s not busy surfing the Web for credit card deals, you will likely find him surfing the waves along Southern California’s coast, where he lives.

One of my very first credit cards was the Chase Cash Plus Rewards Visa. It’s now extinct, but when I opened it in 2005, it was one of the best cash-back credit cards around — 5 percent at grocery stores, gas stations and drugstores. There was no cap on the rewards, no rotating categories and no annual fee. It just gave you a straight up 5 percent rebate on those categories without any tricks or fine-print gimmicks. Nowadays, earning cash back isn’t so simple!

Here are some of the hardest things about cash back that you need to be aware of:

1. Reward caps and tiers

Unfortunately, every year, reward caps seem to become more prevalent. The days of earning an unlimited 3 percent to 5 percent are quickly disappearing. Now, almost every credit card imposes a cap on the amount of category spending that qualifies for higher rewards.

Even the AmEx Blue Cash cards (which were famous for having no caps) recently implemented a cap on the supermarket category. Fortunately, at $6,000 per year, it’s still generous enough for most. Contrast that with the heavily advertised BankAmeriCard Cash Rewards card; only the first $1,500 in combined gas and grocery purchases each quarter will qualify for the higher rewards. That’s hardly sufficient, considering that many households spend more than $500 per month on groceries alone. This is why having multiple reward cards is more helpful than ever; once you max out the rewards on one, move on to the other.

2. Enrollment requirements

A number of cards like the Chase Freedom and Citi Dividend will not give you higher rewards on categories unless you “enroll” in them each quarter. The fact that we have to opt in is really quite ridiculous when you think about it. Unlike say, opting in to be on a mailing list, is there anyone on the face of the planet who would not want to be opted-in to higher rewards? I doubt it.

The reason banks do this is that they need to make a profit on these cards. A lot of people who use rewards cards pay their bills in full. So the only money banks are making on those types of customers are from the processing fees (those are far below 5 percent, which is why banks can’t afford to pay 5 percent cash-back to everyone). If some cardholders fail to opt in to the higher rewards categories, the issuer can avoid big rewards payouts. However, at the end of the day, I would much rather have this annoying enrollment requirement in place than have issuers take away the 5 percent cash-back rate altogether.

3. Minimum redemption amounts

Another complaint I frequently hear on CreditCardForum is that most issuers require you to accumulate a certain amount of cash back before you can redeem it. Fortunately, for many cards, the bar isn’t set too high. For example, on the Chase Freedom card, the minimum is only $20 (2,000 points).

On the other hand, some cards come with a high wall to climb. For example, the Bank of America credit cards (which use WorldPoints), require you to save up a whopping 25,000 WorldPoints for a $250 redemption to get full value (1 cent per point). You can redeem for less than that, but your point value will diminish substantially. The only way to avoid this problem is to do your research before applying for a card, so you know what you’re getting yourself into.

On the bright side, here are some of the easiest things about cash back:

1. Automatic redemption options

Some cards may hold your rewards hostage, but other cards will give them to you freely on a monthly basis. Take the new Capital One Cash Rewards card, which allows you to set up automatic monthly redemption with no minimum required. The American Express Simply Cash card (for businesses) will automatically give you a statement credit for the cash back earned during the previous month.

For those wanting something simple and straightforward, automatic redemption is probably your best choice. However it’s important to point out that, even though it’s easy, it won’t always give you the most bang for your buck. Why? Because with Discover, Chase and other issuers, if you convert your cash back to retailer gift cards, the value might be higher. For example, Discover lets you convert $45 in Cashback Bonus to a $50 Starbucks gift card. If you opt for automatic cash redemption, you’ll miss out on those opportunities.

2. Rewards on regular spending

One of the positive changes that has come over the past few years is that, now, most reward cards don’t limit the amount of cash back you can earn on non-category spending. That means an unlimited 1 percent cash back. You get this automatically, no enrollment or opt-in required.

That being said, I would actually recommend a different card for your non-category or “regular” purchases. Why? Because my favorite rebate programs that give up to 3 percent or 5 percent on categories typically give only 1 percent (or sometimes less) on everything else. That isn’t bad, but you can do better with, say, the Fidelity American Express or Capital One Cash Rewards cards. Instead of doing categories, they just give a flat above-average payout on all purchases.

3. Transparent value

Despite their drawbacks, good cash-back programs still offer the most transparent rewards out there. With airline frequent flier miles, the value of the rewards can be iffy. Depending on when you redeem them, the same round-trip domestic flight might cost you only 25,000 miles — or a whopping 60,000 miles. After you add in seat restrictions and blackout dates, the actual value you end up getting can be a gamble. Sometimes you come out ahead with airline miles, other times not so much.

Meanwhile, with the vast majority of cash-back credit cards, you know precisely what you are earning when you spend your money. Sure, there may be hoops to jump through, but at the end of the day, you know that if you earn $50 in rewards, it will be worth $50. Contrast that to 5,000 airline miles or 5,000 points to be used for merchandise — who knows how much those will be worth?

Michael Dolen is the founder and managing editor of CreditCardForum.com, which is the leading online

forum solely dedicated to credit cards. His “no holds barred” credit card reviews and commentary are regularly featured in financial publications and websites such as The Wall Street Journal, The New York Times, Bloomberg and US News & World Report.

His knowledge and expertise come from real world experiences. After being left with monstrous medical expenses from an auto accident at age 18, he strategically used 0% credit card offers to finance his out-of-pocket costs not covered by insurance. These days, he’s debt free and focuses on finding new ways to maximize rewards and milk cardholder benefits. As a small business owner, he’s also well aware of the struggles that both entrepreneurs and established companies face when it comes to business credit in today’s economy.

When he’s not busy surfing the Web for credit card deals, you will likely find him surfing the waves along Southern California’s coast, where he lives.